More 401(k)s taking 'do-it-for-you' route

By Mark Schwanhausser
Knight Ridder News Service

A new era is dawning in 401(k)s — the hand-holding era.

Recognizing that as many as half the nation's workers are "reluctant investors" who want little to do with managing their retirement accounts, the financial-services industry is rushing into the $1.7 trillion 401(k) market with services that cater to workers who save too little, invest poorly and ignore their portfolios for years at a time.

In short, they want to make inertia work for you.

"We're moving to a place where if employees do nothing, good things happen," said David Wray, president of the Profit Sharing/401(k) Council of America. "It's a complete change from where we were."

The players behind this evolution range from investment powerhouses such as Fidelity Investments, Vanguard and Merrill Lynch to portfolio management and advisory firms such as ProManage and Silicon Valley's own Financial Engines.

For workers to get these services, their employers will have to make them available, though the workers will often pay for it themselves via investment fees.

Some companies want to manage your 401(k) portfolio for you. Some offer simple-to-pick, hands-off mutual funds that steadily invest more conservatively as you near retirement. Some have mechanisms that automatically increase how much you'll save as you get raises. And some employers are taking the dramatic step of forcing workers to invest in a 401(k) unless they take the decisive step of opting out.

The services are a recognition that 401(k)s no longer can ignore the millions of American workers who complain that they lack the know-how or the time to be part-time pension managers. Indeed, a stunning 45 percent of 401(k) investors have never adjusted their investment mix, according to a survey by the Retirement Services Roundtable and Boston Research.

"They're not do-it-yourselfers," said Jeff Maggioncalda, chief executive for Financial Engines, a Palo Alto, Calif., company that introduced a service in mid-October for workers who want someone else to manage their 401(k) investments. "They don't say, 'Teach me.' They don't say, 'Tell me.' They say, 'Do it for me.' "

Take Adrian Cerda, a senior staff engineer at Maxtor, a Milpitas, Calif., company that started offering its 3,100 U.S. workers the chance this spring to let Fidelity Investments manage their 401(k) investments. Ask Cerda why he jumped at the chance and he'll tick off the reasons. It's tough to sort through the 34 funds available in Maxtor's 401(k) plan. He suffered "big-time losses, easily 50 percent" because he invested too heavily in technology and aggressive stock funds during the bust. Fidelity's price seemed fair.

But the three biggest reasons are his wife and two elementary-school boys. Cerda wants to spend his weekends biking, backpacking and playing with his family, not reading investment books and monitoring mutual funds.

"I like to track the markets and know what's happening, but I am not that passionate about it," said Cerda, 40. "My life with my kids and my family is more important to me."

Investment experts always knew there were millions of 401(k) investors like Cerda, said Bert Dalby, a principal with Vanguard, the nation's second-biggest 401(k) provider. But "I think it's a larger percentage than people understood."

That may be especially true after many do-it-yourselfers lost confidence as the stock markets melted down.

To address their needs, the financial industry is rolling out a variety of ways to turn "do-it-yourself" into "do-it-for-you." They include:

• Managed accounts. For an annual fee, the services pick among the funds available in the 401(k) and periodically rebalance the portfolio.

Once workers check the box, the rest is done for them. The services periodically rebalance the portfolio.

Financial Engines is the latest entrant with Personal Asset Manager, which carries a fee of 0.4 percent to 0.6 percent of the 401(k)'s value.

• Age-based mutual funds. Fidelity, Vanguard and other investment houses are rolling out age-based mutual funds with a mix of investments based on how close workers are to retirement. For example, Vanguard will introduce six funds in November that theoretically could serve a worker from the first day on the job until they collect a gold watch, by gradually investing more conservatively as retirement nears.

• Automatic savings increases. Of course, picking investments more smartly is irrelevant if workers save too little. To counter that, some employers soon will let workers elect to automatically siphon off a portion of future pay raises so that 401(k) contributions can grow without pinching today's budgets.

This option is available with Financial Engines' managed accounts, and Fidelity and Vanguard plan to introduce versions within months.

• Automatic enrollment. Concerned that many employees fail to sign up in a 401(k) at all, some companies now automatically enroll workers. Unless workers take the trouble to opt out, the company diverts a slice of each paycheck into a worker's account and invests it in default fund, such as a money market.

As experts see it, only corporate inertia can keep these services from exploding. Workers want them, but they can't sign up until employers sign on with their 401(k) vendor. That means reluctant investors must do something out of character. They must act.

If you want such services, said Fidelity's Kathy Hopkins, "Go talk to your HR department."